The Internal Revenue Service levies an estate tax on assets passed to your heirs and beneficiaries after your death. Although the estate tax was temporarily repealed for 2010, it will return in 2011 and may be continued in following years. A unified credit exclusion of $3.5 million currently applies to estates. Taxpayers with estates in excess of this figure can avoid some or all of the remaining tax by planning in advance and following a few money-management strategies with the help of their accountant, attorney or an estate-planning professional.

1

Transfer money to your spouse, as long as your spouse is a citizen or resident alien. These lifetime gifts are not taxed by the IRS as part of your estate; however, this is a method of deferring taxes and not avoiding them altogether. Any transfers to your spouse made during her lifetime will become part of her estate, which will in turn be subject to estate taxes.

2

Make annual gifts to your children and/or grandchildren. By a revision to Chapter 11 of the Internal Revenue Code, tax-sheltered gifting by an individual is limited to $13,000 and by a couple to $26,000. This directly reduces the amount of your estate that is subject to estate tax; in addition, the beneficiaries are given free use of the money while you are still alive. A custodian or guardian must handle the gifts for minors under eighteen, and distribute the assets to the child when he reaches legal adulthood. You can give tax-sheltered gifts to an unlimited number of people, as long as you don't exceed the maximum amount per person.

3

Set up a trust and place your assets in the trust under the care of a trustee, to be administered by the terms and conditions that you set. The income goes to your spouse or children, but they don't legally own the trust, and thus the assets remain exempt from estate taxes. By the terms of an AB trust, your surviving spouse has the use of the assets that are willed to your children. A QTIP trust allows the spouse to postpone estate taxes until his death. In addition, life insurance policies can usefully be included in a trust. The IRS considers the proceeds from life insurance that is included in a trust and paid out on your death to lie outside of your estate, no matter who the beneficiary is, and free of estate taxes.

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4

Set up a limited partnership among the members of your family, and make investments in that partnership. By the Internal Revenue Code, any organization that is unincorporated, with two or more members, which carries on a business or trade, is classified as a partnership. By the Internal Revenue Service code, the assets of businesses and partnerships are exempt from estate tax, while the income from the business is taxed at a much lower rate than the estate tax.

5

Make a gift to charity, which reduces the amount of your estate, or direct the payment of a portion of your estate to a charity upon your death, to bring your total estate under the current exemption limit. The charity, rather than the federal government, gets the use of the assets, while your heirs avoid dealing with estate tax on assets that they inherit. Charitable gifts made while you are still alive are tax-deductible.

Things Needed

Account documents

IRS guidelines and rules

Warnings

Don't attempt to hide taxable assets from the IRS. The agency has investigative authority, as well as the power to subpoena records and seize money and property, and is a formidable legal opponent.

Tips

Before setting up any accounts or trusts for tax-planning purposes, consult an experienced attorney or estate consultant.

Inform your heirs of your plans and goals for the estate, and make sure your will is updated to conform with your wishes.

References

Photo Credits

About the Author

Founder/president of the innovative reference publisher The Archive LLC, Tom Streissguth has been a self-employed business owner, independent bookseller and freelance author in the school/library market. Holding a bachelor's degree from Yale, Streissguth has published more than 100 works of history, biography, current affairs and geography for young readers.